The 41st GST Council meeting was held on Thursday, 27th August 2020 on a single-point agenda. Union FM Nirmala Sitharaman chaired the meeting conducted virtually via VC.
The Hon’ble FM last announced a meeting for deliberating the single-point agenda of compensation cess in the previous GST Council meeting held on 12th June 2020. It was also announced that the meeting would be scheduled in July 2020. However, the date had not been confirmed so far.
Highlights of 41st GST Council Meet
The 41st GST Council meeting took place via VC and was chaired by Union FM Nirmala Sitharaman on 27th August 2020. As expected, it was a single agenda tabled for the meeting on the methods to compensate the states.
The Finance Secretary addressed the media via VC around 4.30 p.m. The shortfall for the FY 2020-21 works out to be Rs 2,35,000 crore. Out of this, Rs 97,000 crore is the shortfall due to GST implementation, whereas the rest is considered as due to COVID-19, which is an act of god. The states have been provided with two options to meet the shortfall of compensation cess.
Option I- The centre can facilitate Rs 97,000 crore to states as borrowings, through a special window by the RBI, and this can be repaid after 5 years on the collection of cess paying a reasonable rate of interest.
Option II- The states can borrow Rs 2,35,000 crore directly from the RBI.
The states must evaluate both these options within seven working days when the GST Council will again meet to finalise the choices.
Union FM took questions from the press, wherein further clarifications were given on the announcement, as follows:
- The centre will provide a further relaxation of 0.5% in states’ borrowing limit under the FRBM Act for Rs.2.03 lakh crore. The announcement was made in May 2020 at an Aatmanirbhar Bharat press conference. It will facilitate states to borrow more depending upon the severity of COVID-19 impact.
- The pros and cons of both the options were highlighted. If the state goes for the first option, it will be entitled to the compensation cess for later years also with support by the centre. Whereas, the second option involves more amount of borrowing that is paid by using the cess collected during the transition.
- The arrangement remains valid only for the FY 2020-21. Hence, the GST Council will reassess the situation in April 2021 and decide for the 5th year.
- The states can borrow money with the G-security linked interest rates without any hurdles.
- Once the arrangement is approved by the GST Council, the centre will proceed to clear these dues with the help of the RBI and also take care of the rest of the financial year.
- The states must take a decision based on the compensation cess they can expect in the future periods/years.
News and Updates on 41st GST Council Meet
Expectations from 41st GST Council Meet
Compensation of GST revenue to states through borrowing
Currently, there is a shortfall in the compensation cess collected that has not been adequate to distribute the necessary revenue share promised to the states. The cess is imposed on sin goods and certain other luxury goods over and above the GST. The states have been guaranteed a five-year compensation with a 14% increase every year, presently extended up to 2022. The Council will discuss ways in which the shortfall can be met.
There are various options before the GST Council to fund the shortfall in revenue distribution to the states. These include market borrowings, increasing the scope of items subjected to the compensation cess or playing with the GST rates. Any increase in compensation cess on tobacco products such as bidis and cigarettes can earn a revenue of Rs.49,470 crore.
Recently, when the Central Government sought an opinion of the Attorney General of India, it had advised going for state borrowings to fund the deficit with the centre’s guarantee. It had also stated that the centre is not obligated to make the compensation. The market borrowings can be allowed on the base of the future receipts from the compensation fund.
Hence, the Council will most likely go for market borrowings. However, the states are in favour of bringing more items under the compensation cess kitty. The meeting may also evaluate the share of the centre and state in the revenue loss.
Reviewing the preparedness of the e-invoicing system
The GST Council may also take a quick update on the level of preparedness of the GSTN in implementing the e-invoicing system from 1st October 2020.
The next GST Council meeting will be tentatively be held on 19th September 2020, which will cover other issues such as solutions on the inverted tax structure problems and certain rate rationalisation.